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Elective Stock and Scrip Dividends

Isabel Feito Ruiz, Luc Renneboog () and Cara Vansteenkiste
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Isabel Feito Ruiz: Tilburg University, Center For Economic Research
Cara Vansteenkiste: Tilburg University, Center For Economic Research

No 2018-031, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: We investigate firms’ decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms’ cash-preservation motives.

Keywords: stock dividends; scrip dividends; elective stock dividend; optional stock dividend; dividend policy; payout policy; crisis; dividend reinvestment plans; DRP; financial constraints; financial crisis; cash retention; mergers and acquisitions (search for similar items in EconPapers)
JEL-codes: G35 G32 G34 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2018
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